Reserve Bank of India (RBI) keep
interest rates (Repo Rate) unchanged but reduced Statutory Liquidity Ratio (SLR)
by 50 basis points to 21.5% from 22% in its sixth bi-monthly policy review. The first bi-monthly monetary
policy statement for fiscal year 2015-16 is scheduled on Tuesday, April 7,
2015.

The Reserve Bank left
interest rate unchanged saying there was no substantial development on
inflation or fiscal fronts to warrant a fresh reduction.

Why RBI
reduced SLR?

In order to create space for banks
to expand credit, the SLR is being reduced from 22.0 per cent of NDTL to 21.5
per cent. Banks should use this headroom to increase their lending to
productive sectors on competitive terms so as to support investment and growth.

Know About
SLR –

Background: The maximum and minimum limits for the SLR are 40% and 25% respectively in India. Following the amendment of the Banking regulation Act(1949) in January 2007, the floor rate of 25% for SLR was removed. Presently, the SLR is 21.5%.

1. What is Statutory Liquidity Ratio (SLR)?

It is the amount a commercial bank needs to maintain in the form of
cash, gold, or government approved securities (Bonds) before providing credit
to its customers. SLR is determined and maintained by the RBI in order to
control the expansion of bank credit.

Penalty: If any Indian bank fails to maintain the required level of Statutory
Liquidity Ratio, then it becomes liable to pay penalty to Reserve Bank of India
in
respect of that default, the penal interest for that day at the rate of three
per cent per annum above the Bank Rate on the shortfall.

If the default continues on the next succeeding working
day, the penal interest may be increased to a rate of five per cent per annum
above the Bank Rate for the concerned days of default on the shortfall.

2. How is SLR determined?

SLR is determined as the percentage of total demand and percentage of
time liabilities. Time Liabilities are the liabilities a commercial bank is liable
to pay to customers on their anytime demand.

3. What is the need of SLR?

With SLR, the RBI can ensure solvency of a commercial bank. It is also
helpful to control expansion of Bank Credits. By changing the SLR rates, RBI
can increase or decrease bank credit expansion.

4. What happens
when RBI increases or reduces the SLR Rate?

When RBI decreased SLR, Banks have more money
with them to lend to their customer, thus banks charge their customers a lower
rate of interest when it comes to home and auto loans.

When RBI increased
SLR, Banks have less money with them
to lend to their customer, thus banks charge their customers a higher rate of
interest when it comes to home and auto loans.

Current rates
are as follows

1. Repo Rate
– 7.75% (unchanged)

2. Reverse
Repo Rate – 6.75% (unchanged)

3. Cash
Reserve Ratio (CRR) – 4%

4. Statutory
Liquidity Ratio (SLR) – 21.5%
(changed)

5. Bank Rate – 8.75% (unchanged)

6. MSF Rate – 8.75% (unchanged)